SAMUELSON: Geither says little about crisis warning signs

WASHINGTON – We now have Timothy Geithner's 528-page memoir of the financial crisis and its aftermath. Called "Stress Test," it's full of fascinating details of a frightening time. For me, the most striking incident involves a call between Geithner and Lloyd Blankfein, the head of Goldman Sachs.

This is September 2008. Lehman Brothers has just failed. Many huge financial institutions are threatened. Confidence is shredding. Events seem to be spinning out of control. Geithner sees Blankfein as one of Wall Street's "calmer, stronger, smarter" voices but finds him "shaken." Geithner tells him:

"Lloyd, you cannot talk to anyone outside your firm, or anyone inside your firm, until you get that fear out of your voice," I said. "You can replace it with anger or you can cover it up. But you can't let people hear you like that."

Geithner headed the New York Federal Reserve Bank (2003-09) and was President Obama's first Treasury secretary (2009-13). His rebuttal is what he calls the "paradox of financial crises." You have to save the financial system, he argues, even if the financial system — through poor lending and reckless speculation — got you in trouble.

"When the financial system stops working, credit freezes, savings evaporate, and demand for goods and services disappears, which leads to layoffs and poverty and pain," he writes. When investors and creditors start to panic, consumers and businesses follow suit."

On this, Geithner is correct. It wasn't certain when the economy would stabilize. It would have been later if, say, Citigroup or Bank of America had failed. We were spared another cycle of panic, imploding stock prices, lost wealth and fewer jobs.

Geithner provides some convincing data. The economy's recovery, though slow and disappointing, still compares favorably with many precedents. In the 1930s' Great Depression, employment did not regain its pre-crisis peak for eight years. Today's employment is near its pre-recession peak after six years. For financial crises in Europe and Japan from the mid-1970s to the early 1990s, the average time to reach pre-crisis employment was 15 years.

Similarly, the government's financial rescues made money. Most banks repaid with interest the amounts they received; many other subsidies have been recovered (or will be) with interest.

But why wasn't the financial crisis anticipated? Here, Geithner is less insightful. As early as 2004, staff at the New York Fed did a study titled "Are Home Prices the Next Bubble?" The conclusion was, no. Prices might fall in some localities, but there would be no nationwide slump because since World War II there never had been.

These problems were regarded as isolated in a basically sound economy. Banks seemed to have more than enough capital to absorb bad loans. As late as August 2007, when the "subprime" mortgage problem was increasingly understood, unemployment was only 4.6 percent.

We thought we had outgrown panics. Prolonged financial "stability can produce excessive confidence, which produces the seeds of future instability," he writes. Precisely. The long boom beginning in 1982 and lasting until 2007 convinced bankers, business leaders, economists and households that economic risk was waning.

Success at stabilizing and stimulating the economy in the short run can destabilize it in the long run. But the lesson is not acknowledged because its implications are unpopular.